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Sunday, July 15, 2012

Gold to Be Reclassified in the U.S. as a Tier 1 zero-risk asset! Gold is money after all!

Blogman's Notes: For 40+ years the world's Central banks have fought hard to deny that Gold is money, real money; the intention has been to prove that the paper they create out of thin air is money and not gold. In the Bond movie, Goldfinger, the villain had a diabolical plan to steal the US gold out of Fort Knox and bring the Economies of the world down, so even in the 60's people understood that paper was money only because it was backed by gold. Gold has been recognized as the best form of money for 5000 years because it cannot be created out of thin air and is found only in limited quantities. Therefore gold (and silver to a lesser extent) reflects the true value of paper money. If the price of gold can be manipulated, as it has been, since 1980, it would make paper currencies such as the US dollar, the UK pound and other paper currencies that have no intrinsic value look good. The trouble with paper currencies is that they eventually find their true value, which is zero, and this is where all paper currencies are headed unless they are backed by gold. The Federal Reserve of the US well understands that the more dollars it prints, the less confidence foreign nations will have in the dollar. And as the paper stock and bond markets provide zero or even negative returns, it will become obvious to investors that these instruments are worthless, and the banks that issue them, even Central banks are institutions with no real value. So before there is a run on all things paper, the powers that be will continue to pretend that their System has real value by recognizing gold as an asset on par with their paper. This will give some perceived value to banking institutions, Central banks and Commercial banks. The fact still remains that if all paper assets were to be backed by gold, gold's value would be 100 times what is it today, if not more. Since that will never be allowed to happen, the collapse of all things paper will remain a certainty but the game may continue a bit longer. However, for those who have invested in gold (and silver), this recognition of gold as a tier 1 asset will pay big dividends, for the price of gold will rise substantially. For those who understand the System, it will mean, that the value of paper currencies has declined substantially, which is the only reason that the PTB have allowed gold to once again be recognized as money, a position it has held for 5000 years.

I recently wrote in these pages about the Bank of International Settlements (BIS) proposing to reclassify gold bullion as the safest and the highest quality of asset for central banks and all other banks around the world: Tier 1 capital.

Regardless of how the central banks wish to classify gold bullion, it is the market that will eventually decide the value of gold bullion, which has retained its value and played a significant role as a monetary asset for 5,000 years.

The central bank in the U.S.—the Federal Reserve—has recently released a memo to possibly change the status of gold bullion in this country. (Source: Federal Deposit Insurance Corporation, June 18, 2012.)

Currently in the U.S. and in many parts of the world, gold bullion is classified as a risk asset on which banks are allowed a 50% weighting. This means that for every $1.00 of gold bullion held, $0.50 worth is recognized as value on the books of the banks or central banks. The whole $1.00 is not recognized, because there is a risk, according to the classification, that gold bullion could lose its value rapidly.

Again, these are classifications created by central banks and have no bearing on the true value that the market will place on gold bullion.

Still, it is significant that the U.S. is proposing to reclassify gold bullion as a zero-risk asset, as early as January 1, 2013. This means that gold bullion will join the very short list of assets considered zero-risk by the Federal Reserve: U.S. Treasuries; the U.S. dollar; and assets and/or claims with the International Monetary Fund.

So the central bank of the U.S. has joined the BIS in raising the status of gold bullion. Should the reclassifications indeed be instituted in 2013, it should increase demand for gold bullion by the banks here in the U.S., as gold bullion would be worth dollar-for-dollar on the balance sheet what a particular bank paid for it.

Furthermore, there is new legislation for banks around the world with Basel III. Basel III requires banks to increase their holdings of Tier 1 capital. If gold bullion is reclassified as Tier 1, then the banks can now use gold bullion as a diversification from other assets on their balance sheets.

Central banks around the world are taking steps to reclassify gold bullion to the status that is has held for 5,000 years: money. The proposed and very significant change by the Federal Reserve here in the U.S. should increase the demand for gold bullion and subsequently the price for the yellow metal. (Also see: “Japanese Pension Fund Buys Gold as Currency.”)